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Standard costing

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Standard costing

  1. 1. Standard Costing
  2. 2. <ul><li>Standard Costing is a technique which uses standards for costs and revenues for the purpose of control through variance analysis </li></ul><ul><li>Standard is a predetermined measurable quantity set in defined conditions against which actual performance can be compared, usually for an element of work, operation or activity. </li></ul>
  3. 3. <ul><li>Basically a standard means </li></ul><ul><li>Predetermined estimates </li></ul><ul><li>Established for inputs and outputs </li></ul><ul><li>Applicable to all routine aspects of an organization's operations </li></ul><ul><li>Accounting for standard costs and obtaining variances </li></ul><ul><li>Reporting to management for taking appropriate action wherever necessary. </li></ul>
  4. 4. Objectives of Standard Costing <ul><li>To provide a formal basis for assessing performance and efficiency </li></ul><ul><li>To control Costs by establishing standards and analysis of variances </li></ul><ul><li>To enable the principle of “Management by Exception” to be practised at the detailed operational level. </li></ul><ul><li>To assist in setting budgets </li></ul>
  5. 5. <ul><li>To assist in assigning responsibility for non-standard performance in order to correct deficiencies or to capitalise on benefits. </li></ul><ul><li>To motivate staff and management </li></ul><ul><li>To provide a basis for estimating </li></ul><ul><li>To provide guidance on possible ways of improving performance </li></ul>
  6. 6. Types of Standards <ul><li>Current Standard- Current Standard is a Standard established for use over a short period of time, related to current conditions. </li></ul><ul><li>Basic Standard- Basic Standard is a Standard established for use over a long period of time from which a Current Standard can be developed. </li></ul>
  7. 7. <ul><li>Ideal Standard –It is the Standard that can be attained under most favourable conditions.No provision is made for shrinkage,spoilage or machine breakdown etc. </li></ul><ul><li>Ideal Standards are not generally used because it may influence employee motivation adversely. </li></ul>
  8. 8. <ul><li>Attainable Standard- It is a standard which can be attained if a standard unit of work is carried out efficiently, on a machine properly utilised or material properly used. </li></ul><ul><li>Allowances are made for shrinkage, spoilage or machine breakdown etc. </li></ul>
  9. 9. Establishing Cost Standards <ul><li>Engineering Estimates </li></ul><ul><li>Observed Behaviour </li></ul><ul><li>Predicted Behaviour </li></ul><ul><li>Desired Behaviour </li></ul>
  10. 10. Variance Analysis <ul><li>Variance is the difference between planned, budgeted or standard cost and actual cost as well as in respect of revenues. </li></ul>
  11. 11. <ul><li>Variances can be classified into the following categories: </li></ul><ul><li>Material Variance </li></ul><ul><li>Labour Variance </li></ul><ul><li>Variable Overhead Variance </li></ul><ul><li>Fixed Overhead Variances </li></ul><ul><li>Sales Variances </li></ul><ul><li>Profit Variances </li></ul>
  12. 12. Material Cost Variance <ul><li>Standard Cost of Material- Actual Cost of Material </li></ul><ul><li>=(Standard Units x Standard Price) – (Actual Units x Actual Price) </li></ul>
  13. 13. Material Price Variance <ul><li>Actual Quantity (Standard Price Per Unit- Actual Price Per Unit) </li></ul>
  14. 14. Material Usage Variance <ul><li>Standard Price Per Unit (Standard Quantity-Actual Quantity) </li></ul><ul><li>Material Usage Variance is segregated into </li></ul><ul><li>(i) Material Mix Variance, and </li></ul><ul><li>(ii) Material Yield Variance </li></ul>
  15. 15. Material Mix Variance <ul><li>Standard Price (Revised Standard Quantity- Actual Quantity) </li></ul><ul><li>Revised Standard Quantity </li></ul><ul><li>= Total Quantity of Actual Mix </li></ul><ul><li>Total Quantity of Standard Mix </li></ul>
  16. 16. Material Yield Variance <ul><li>Standard Cost per unit (Standard Output for Actual Mix – Actual Output) </li></ul>
  17. 17. <ul><li>Material Cost Variance </li></ul><ul><li>= Material Price Variance+ Material Usage Variance </li></ul><ul><li>Where, Material Usage Variance = Material Mix Variance+ Material Yield Variance </li></ul>
  18. 18. <ul><li>Thus Material Cost Variance </li></ul><ul><li>= Material Price Variance+ Material Mix Variance+ Material Yield Variance </li></ul>
  19. 19. From the following data compute the material cost variance: Material Standard Actual Qty Price Qty Price (Units) (Rs.) (Units) (Rs.) X 3,500 10 3,700 12 Y 1,500 21 1,650 20 Z 1,000 33 1,250 36